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JC Penney: The Next Front in the Icahn Vs. Ackman Spat?

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The struggling retailer received a nasty surprise from a group of its bondholders last week.

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JC Penney (NYSE:JCP) shares have sunk 53% since February 1, 2012, the day the company brought in its new "Fair and Square" prices policy.

Under the plan, spearheaded by recently hired CEO Ron Johnson, who is best known as the creator of Apple's (NASDAQ:AAPL) retail stores, JC Penney did away with its ubiquitous coupon sales and went with an "everyday low prices" policy. The thinking was that customers would come into the store more often instead of waiting for a sale; it's an approach that has been used to great effect by a number of other retailers, most notably Wal-Mart (NYSE:WMT).

"Coupons were a drug, they really drove traffic," Johnson said at the time.

But going cold turkey doesn't appear to be the tonic that the 110-year-old chain needed. The move has instead pushed customers to look elsewhere for the deals they used to get from JC Penney-or shop at online retailers like Amazon.com (NASDAQ:AMZN).

In the first quarter after JC Penney announced the move, sales dove 20.1% from a year earlier, and the company posted an adjusted loss of $55 million, or $0.75 a share. The damage continued in the next quarter, with sales dropping 22.6% and Penney's loss widening to $81 million, or $0.37 a share. And in the company's latest quarter, which ended October 27, 2012, the hill got steeper: Sales slumped 26.6%, and adjusted loss ballooned to $203 million, or $0.93 a share.

JC Penney Reverses Course

Stung by the losses, JC Penney has recently begun to reverse course. The creep back toward coupons started with the company's Black Friday sale, under which JC Penney mailed customers a $10 "gift" to use at the stores.

"This invitation is in no way a reflection of a departure from our Fair and Square everyday low prices," JC Penney spokesperson Kate Coultas wrote in an email to the Associated Press at the time.

Now, JC Penney has announced that it will offer other sales tied to certain times of the year. Right now, for example, it is offering discounts on jewelry in the run-up to Valentine's Day.

JC Penney Bondholder Group Could Make Life Miserable

As if this weren't enough, the company now faces a challenge from a group of its bondholders. On February 4, JC Penney received a letter from law firm Brown Rudnick that accused it of breaching a covenant of its bond indenture agreement by putting up store inventory as collateral for a line of credit it took out in January 2012.

The firm claimed to represent more than 50% of holders of the company's 7.4% bonds due in 2037. In all, these investors hold about $326 million of debt. However, the letter alleges that the company could be in breach of this covenant for all of its $2.9 billion of long-term debt. The letter also said the bondholders believed that, as a result of this alleged action, all the company's debt could become payable in less than three months-something that would almost certainly drive it out of business.

JC Penney has since filed a lawsuit to stop the group from declaring a default on the bonds. "We believe this notice of default is invalid, completely without merit and is intended to create self-interested trading opportunities in the market, and we will therefore vigorously defend the interests of JC Penney and all of our constituencies," CFO Ken Hannah responded in a statement quoted by Bloomberg.
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